Monday, August 16, 2010

"One data point proves nothing – but it is suggestive that Germany’s economy (including employment) is starting to boom (as reported here by The Economist) while the US economy continues to sputter: government in the former nation is following a policy of (relative) fiscal austerity while government in the latter nation is following a policy of wild-spending and deficit-bloating fiscal expansion."

I didn't know what to make of this when I read it last night. I don't know Germany that well. I know that they weren't hit as hard in the first place and that their banking sector came out largely unscathed which seems... ummm... important to mention. But besides that I honestly didn't know how accurate Don's characterization of the fiscal policies of the two countries was. Since he failed to furnish any data on that, I decided to check for myself. Readers of the blog know that I've been tracking the miserable trend in government spending in the U.S., and pointing out that you can only think we've done anything like fiscal stimulus if you're only looking at the federal government - if you look at all government spending, fiscal stimulus has been largely absent. The feds are filling the hole that the states are digging, that's essentially what things have amounted to.

Anyway, I checked out German and American quarterly percentage change in public spending, and here it is:

Fig. 1 Quarterly percentage change in government spending

It's somewhat hard to compare, but it certainly doesn't look like the U.S. is trouncing Germany in fiscal policy, does it? Particularly in more recent quarters, Germany seems to be spending more in the public sector than the U.S. - and in the first quarter of 2010 (the last year of German data I found), they're beating the U.S. substantially. But let's take these figures and look at cumulative quarterly percent change to see if my eye-balling it is meaningful:

Fig. 2 Cumulative quarterly percent change in government spending

These data seem to confirm my suspicions - for most of the crisis, Germany has been outpacing the U.S. in government spending and the gap isn't closing because Germany has kept up its fiscal policy. This is due to two factors:

1. Germany has stronger automatic stabilizers which are so integral to German political economy that Merkel doesn't even think to mention it on the public stage - and certainly not when she's brow-beating other countries about austerity.

2. The U.S. is a federal system where a substantial portion of government spending is done at the state and local level. Germany is too, of course, but the German Länder don't seem to have the pro-cyclical proclivities that U.S. states do.

If Don checked the data, he'd realize he doesn't quite have the case he thinks he does. As a rought cut, Germany seems to have stronger, not weaker, fiscal stimulus than the U.S. does, particularly in early 2010 (which of course is going to make a big difference in GDP numbers that come in now). I don't think this is firm evidence in favor of Keynesians either, but it's certainly not evidence against us.

Add to these stubborn facts that Germany didn't have nearly as bad a crisis as we did in the first place, and I'm really struggling to see Don's point. Perhaps he can tell us.

*All data is from Eurostat's national accounts. I compared their figures for the U.S. to the BEA's, and they look quite comparable - a few small discrepancies probably due to different national accounts definitions. If you look at earlier posts of mine on U.S. public spending trends, you'll see essentially the same pattern in the BEA data that I present here in the Eurostat data.

14 comments:

Germany's federalism is much stronger than American federalism; in large part that is the result of the development of the German state after WWII. The sort of strong arm tactics that the federal government does in the U.S. are somewhat unheard of in Germany.

"Add to these stubborn facts that Germany didn't have nearly as bad a crisis as we did in the first place..."

Germany has been in a bad place in comparison to the U.S. for quite some time ... if we think of this in terms of unemployment, etc.

Xenophon, I'm just struggling to understand how that informs the policy issues Don and I are discussing. The general findings of the literature have been that other policy positions inform Germany's structural problems.

You're certainly not going to find any justification at all for Germany's structural problems in quarterly, percentage change data covering the last couple years - which is the data I'm presenting here.

I don't think it has anything to do with "automatic stabilizers". Spain also has extensive "automatic stabilizers", yet is worse off than any other country in Western Europe. The nature of the recession in Germany is just different from that in the United States and Spain. The German problem is that it felt the ripple effects of the bubble, mostly through out its export industry. It's not as structural as Spain's or the United States's.

In any case, I'd like to see comparisons between actual spending. Percent change honestly says really little, and if the argument is based totally on spending it would mean that the United States should still be doing better than it is, even if not as good as Germany.

"Spain also has extensive "automatic stabilizers", yet is worse off than any other country in Western Europe."

Spain also had a banking crisis and no recourse to devaluation, no?

"In any case, I'd like to see comparisons between actual spending. Percent change honestly says really little, and if the argument is based totally on spending it would mean that the United States should still be doing better than it is, even if not as good as Germany."

Why would levels inform percent change in GDP? So let's say the U.S. government spends half what Germany does as a percentage of GDP. If the U.S. increased government spending by 100% are you saying that that fiscal policy would now be comparable to the Germans?

When we're tracking rate of change in output, I think we want to look at rate of change in spending, don't we?

Yes, that's what I said in my comment, Spain's recession was different from that of Germany's. That was, in fact, one of my points.

And, um, your graphs don't depict what each country spends as a percentage of GDP. It depicts spending as percentage changes, which is different. That was my entire point when I asked for a graph depicting cumulative spending altogether.

"When we're tracking rate of change in output, I think we want to look at rate of change in spending, don't we? "

Yes and no. I'm not saying this is the case, but the U.S. government could have been spending 100x as much as the German government, and so a smaller change in output would really be inconsequential, as all-around deficit spending would still be greater.

Oh I know you said it - sorry didn't mean that to be a refutation. Just adding the other concern that's been brought up, namely monetary flexibility.

On the percent of GDP - no I don't have that but that's my point in response to you - for structural questions the public share of the economy is certainly going to matter a great deal. For cyclical questions it really makes sense to look at rates of change acting on rates of change in output.

I'm not quite sure it's appropriate to use rates of change in percent of GDP, though, because then the variable you're explaining (GDP) is on the right and left hand side of the equation since it will be in the denominator.

It's like people ignoring the fact that a big part of the reason why Hoover's spending as a percent of GDP increased so much was that the denominator was falling so precipitously! Does it tell you that when you keep spending more or less constant GDP will fall, or does it tell you that if you increase spending as a percent of GDP, then GDP will fall?

"That was my entire point when I asked for a graph depicting cumulative spending altogether."

And my point was that that is inappropriate because it's relevant for structural questions, but not fiscal policy impact or cyclical questions. All I was trying to get at with the cumulative chart is just to look at the total change in government spending over the course of the crisis.

And ultimately I'm not trying to make a solid case for fiscal policy here.

My point is only that Germany responded at least as vigorously, relative to their baseline spending before the crisis, as the U.S.. You add that to the significant differences in the nature of the crisis, and you really have to scratch your head as to what Don is talking about.

No, my point is that cumulative spending is important, because percent change can be totally irrelevant if one country simply has spent disproportionally more than another. In other words, if Germany has spent $1 so far on the crisis, and the United States $100, what does it matter if Germany increases spending by 100%? It still amounts only to $2.